The Lacuna in the Real Estate Bill

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The Real Estate Bill may protect the home buyers who can afford the high housing prices, but it does not address important issues straining the housing market.

The Real Estate (Regulation and Development) Bill, currently under consideration in parliament, can be useful in protecting home buyers from exploitation. But the bill does not address the issue of a high housing prices, which are unaffordable for a large number of prospective buyers.

Home prices used to appreciate at a high rate in many parts of India in the past, but in recent years there has been an important change – the appreciation rate has slowed down to such an extent that the price appreciation for urban residential properties has dropped to zero over the 2007-14 period, after adjusting for the general inflation. However, this development has only arrested a further rise in real prices, while absolute prices are still high for most people in India.

Consider, what may seem, a digression. There has been a revolution as far as the access to computers, internet and mobile phones is concerned. Prices have come down enough such that even the poor have benefitted. A similar change has occurred in the pricing and availability of consumer durables and vehicles over the last two decades. But the housing industry has steered clear of this trend. Why is that?

Permit Raj strain on housing market

It is often said that there is a shortage of land in India. This is, however, not true as far as the availability of land for homes is concerned. In actuality, very little land is required for housing or urban development. A calculation reported by Ajay Shah, a professor at the National Institute of Public Finance and Policy, shows that even if all of India’s population had a dwelling of 1000 square feet per family of four, this requires only 0.76% of India’s land area, assuming a low floor space index of one. Even if a multiple of 0.76% is considered for various reasons, the land requirement is still small. But this is not unique to India. For instance, in the US urban land area accounts for only 2.6% of the total area of the country, as stated by Nobel laureate Robert Shiller in his book Irrational Exuberance.

Even with no shortage of land for housing purposes prices may stay high. The high price of an asset is usually identified with a bubble, irrational exuberance, speculation and investor demand. Typically, such factors cannot sustain high prices for too long, but the Indian real estate market belies this trend. What then explains the housing crunch in India?

The shortage of homes in the country is due to the Permit Raj. Although the system was abolished in the early 1990s in the manufacturing sector, it remains active in the real estate industry, resulting in the man-made shortage of housing and artificially high prices.

Under the permit system, builders need approvals for development and construction, given the master plan of a township or a city. The process of approvals involves delays, contacts with officials, politicians and ‘god-fathers’ and black money. All this can act as barriers to the entry of many hardworking and sincere people in the construction of homes. The result is that by and large the costs are high, the quality is low and there is little innovation.

More important, the government approves the master plans for a small number of townships, each of which is for a limited area. This is at the very heart of the limited supply relative to the huge needs and capability of the economy.

Why the system persists

One reason for the government continuing to stick to the restrictive permit system could be faulty planning, with planners perhaps underestimating the very large needs of the economy. Besides, doing away with the system would also impact vested interests.

Typically, the government delegates the internal development of new townships to developers, while it is supposed to carry out the external development by itself. This could explain why the government is often reluctant to give out licenses for real estate development in areas with little infrastructure. This brings up a ‘sister concern’ of the permit system – the government does not provide nor does not meaningfully enable the private sector to provide the external development of new townships, although here are some exceptions, such as the Dholera and GIFT City towns in Gujarat.

The government’s ‘100 smart cities’ project is a good initiative, but at present, the emphasis is on the government to plan, provide finances and build the infrastructure. This is proving to be difficult, which is perhaps why the government is effectively scaling down the plans in various ways. Thus the expansion in the real estate sector is likely to be smaller and slower than what was initially suggested.

It is important to stress that a zero-sum game is not involved in real estate development. Given the permit system, the loss to prospective home buyers can be far greater than likely gains made by developers, brokers, tax authorities, investors and existing home owners. This is a deadweight loss to the economy as a whole.

Although the permit system goes a long way in explaining the high housing market price in urban areas, it also impacts the prices of land in rural areas, albeit indirectly. Given the high price of urban land, farmers and their representatives feel that the price of rural land should also be high. But they are merely following the high price, and are not leading it or causing it.

As parliament considers the real estate bill, apprehensions persist that the new regulations may add to the restrictions already in place as part of the Permit Raj and may act as a dampener on the rapid expansion of the real estate industry even as it protects the relatively well-off who can afford to pay or who have access to loans to pay the high prices.

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It is true that there is a limit to what the central government can do. All the more then that there is a need to prioritize. If the prices are high, which is an important issue for those who are getting totally left out from aspiring to own, then there is need to set that right.

Also, under AMRUT (formerly, JNNURM), the central government has influence over the state governments even where a matter falls within the purview of the state governments.

Finally, the broad message of my article was not what the central government should do. Instead, the article is about what the public authorities in general need to do whether they are at the centre, in the states or they are the local level. The basic message in the article is about lacuna in the broad framework (and not just in the specific real estate bill under consideration) within which housing policies are being thought about in India. Since the real estate bill was under consideration by the Parliament, it was an occasion to reflect on the broader issues.

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